Australia bans short selling too

It seems incredible – this rollback of the free markets. But, six countries have now banned short sellers of financial shares as if they are solely responsible for the market meltdown we suffered in the wake of the Lehman bankruptcy. The latest to join in the curbs is Australia.

The country has yet to see the attacks on financial services shares that we have seen in the U.S. and UK in particular. So, perhaps they are preemptively striking against the shorts lest they be the next country to suffer systemic risk.

Obviously governments around the globe are turning to market manipulation in order to tame animal spirits.

Australia’s corporate regulator extended a ban on short selling to so-called covered transactions, following similar moves in the U.S. and U.K. in an attempt to cut volatility in the stock market.

Traders won’t be allowed from today to transact covered short sales, in which stock is borrowed for the purposes of betting on share price declines, unless they are hedging positions, the Australian Securities and Investments Commission said on its Web site yesterday. It abolished so-called naked short sales, in which traders never borrow the shares, last week.

The ban covers all stocks traded on the Australian exchange and follows the U.K., Germany, France and Belgium in barring short sales to defend banks from trading blamed for helping wipe $3.8 trillion of value off global stock markets this week. The U.S. Securities and Exchange Commission halted short selling of financial companies to stop speculators benefiting from the credit crisis that led to the collapse of companies including Lehman Brothers Holdings Inc.

“Anyone who’s got a short position this morning is in trouble,” said James Chirnside, who manages the equivalent of $63.3 million at Asia Pacific Asset Management, a Sydney-based hedge fund manager. “This decision directly affects about 150 hedge funds, some of which may be forced to close as a result.”

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

Unwarranted

“Short sellers are not agents of the Devil,” said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. “The current market hue and cry on the part of individuals such as John Mack seems completely self serving and totally unwarranted.”

Australia’s benchmark S&P/ASX 200 Index jumped 3.5 percent as of 11:23 a.m. in Sydney. Macquarie Group Ltd., Babcock & Brown Ltd. and Allco Finance Group Ltd., among the stock market’s biggest losers as they blamed short sellers for targeting their stock this year, surged.

ASIC and the Australian Securities Exchange said the ban on covered short sales did not include hedging positions placed before today. The regulators abolished naked short selling on Sept. 19, raising concerns that investors are flooding markets with sell orders to drive down prices.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.